Regulation D Offers Companies Exemptions When Raising Capital from Investors

Businesses looking to raise capital by selling securities have options that will offer them exemption from the SEC’s registration requirements. The Regulation D exemptions allow companies to raise capital by using a Private Placement Memorandum document as the official disclosure paperwork for investors.

Issuers of private placement memorandums (PPMs) should familiarize themselves with Regulation D, the rules that establish three transactional exemptions from the registration requirements of the Securities Act of 1933. These exemptions allow some smaller companies to offer and sell their securities without having to register securities with the SEC.

Rule 504 provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any consecutive twelve-month period. This rule does not put a limit on the number of investors, permits the payment of commissions, and imposes no restrictions on the manner of offering or on the resale of securities. In addition, no specific disclosure or registration requirements apply under this rule.

Rule 505 allows some companies which offer securities exemption from the registration requirements of federal securities laws. A company can offer and sell up to $5,000,000 of securities sold in any consecutive twelve-month period. An unlimited number of accredited investors are allowed under this rule, and sales are permitted for up to thirty-five non-accredited investors. However, Rule 505 requires the issuer to notify the prospective investors that they will receive “restricted” securities. Furthermore, under Rule 505, an issuer may not use any general solicitation or advertising in order to sell securities.

Rule 506 allows companies to raise an unlimited amount of money.  This rule is available to all issuers for offerings sold to an unlimited number of accredited investors and no more than thirty-five non-accredited purchasers. However, this rule requires that all non-accredited investors, if they are alone or with a purchaser representative, be sophisticated. This means that they must have sufficient knowledge and experience in business and financial matters that will allow them to evaluate the merits and risks of the proposed investment. Rule 506 also prohibits any general solicitation or general advertising in the sale of securities.

Los Angeles business attorney Anthony Spotora, Managing Attorney to his eponymous Century City law firm, Spotora & Associates, advises that, “Time and time again the exemptions provided by Regulation D have offered our clients a reasonable and business savvy means of achieving their often long-desired goals.  From film financing and real estate to product development, we have drafted and had the good fortune to then witness how a properly prepared PPM, inclusive of the apposite rules of Regulation D, can serve as a necessary conduit between an undercapitalized company and the investors vital to its success.”

Companies who choose to use the exemptions offered under Regulation D do not have to register their securities and generally are not required to file reports with the SEC. PPMs should be prepared in consultation with a lawyer who has experience drafting private placement memorandum and dealing with federal and state securities law.


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This entry was posted on Wednesday, May 19th, 2010 at 9:19 am and is filed under Business & Corporate Law, Corporations. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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